"The stock was $33 when we started to invest," he said. Tesla closed on Thursday at $187.42 per share. He said his average cost of buying the stock over more than three years is "over $200 now." Tesla's all-time high was around $280 per share in July 2015.

"[But] it's risky," the founder of Baron Capital told "Squawk Box." "Initially they have to prove the concept; then they got to prove they can make them; [and] they got to prove they can make them profitably."

"With Tesla, nobody wants you to succeed except for the people who buy their product," he said. "The car dealers don't want you to succeed because the [Tesla] cars don't need service. The unions don't want you to succeed because Tesla is remaking the way you make cars."

On Wednesday, Tesla said its planned merger with SolarCity would add $500 million to the electric automaker's balance sheet over the next three years, while contributing more than $1 billion in revenue next year.

Tesla Chairman and CEO Elon Musk — also chairman of the solar panel company and the largest shareholder of both companies — has been making the case for the $2.6 billion deal since it was announced in August.

Baron also talked up the deal on CNBC on Friday, calling it a necessity, because he believes that all vehicles will eventually be electric.

"If I'm right, there's a tremendous demand for electricity. Where do you get it from? The electricity grid is not growing. They are not building new power plants," he said.

Under that dynamic, he said Tesla has to buy SolarCity because it's "not going to have enough electricity for cars" otherwise. "The reason you're buying it is you are reinventing the electric grid. That's a bigger opportunity than cars."

Last week, Tesla said it earned an adjusted quarterly 71 cents per share, in only its second profitable quarter ever, compared with an expected loss of 54 cents per share. Third-quarter revenue also beat forecasts on record sales.

Ahead of Friday trading, Tesla shares were off 7.3 percent since reporting results.